When I read about the Chinese government’s big (more than half-trillion-dollar) plans for fiscal stimulus a few days ago, I wondered what this encouraging of Chinese consumption would do to their desire to invest in our Treasuries–i.e., that large credit line China’s been providing to the U.S. government all these years. We’re used to relying on Chinese saving to fund our consumption; now it seems China wants to fund some consumption of their own.
Here’s some recent (8-year) history on our reliance on Chinese saving to fund our budget deficits… From the latest Treasury data on foreign holdings of Treasuries, at the end of Aug. 2008, China held $541.0 billion in U.S. Treasury securities. (Coincidentally, this is quite close to the size of the fiscal stimulus China is now contemplating.) This is a $479.5 billion (nearly 800 percent) increase from Jan. 2001, when China’s holdings were just $61.5 billion. Over the same period, total foreign holdings of Treasuries rose from $1,010.8 billion to $2,740.3 billion, and the stock of Treasury debt held by the public, or net debt, rose from $3,388.0 billion to $5,479.1 billion. These figures imply that since January 2001, 83 cents of every dollar of additional U.S. public debt has been financed by foreign investors, and 23 cents of every dollar (out of the 83 cents) has been financed by China.
This article in today’s Washington Post (by Ariana Eunjung Cha) elaborates on how China is trying to get away from their “Thriftsville” reputation:
For generations, American consumers have been one of the most powerful economic forces on the planet. Whenever the U.S. economy went south, shoppers could be depended on to come to the rescue with their open wallets. With home values falling, credit running dry and jobs disappearing, that’s not happening this time. Retail sales plunged by 2.8 percent — the largest amount on record — in October from the previous month, according to Commerce Department figures released Friday.
The opposite is true in China.
Long known for high saving rates, China’s middle-class consumers are starting to spend like their American counterparts. Of China’s 11.4 percent growth in the gross domestic product last year, the largest segment, 4.4 percent, was in consumer spending. That sector still represents just 38 percent of China’s overall GDP, roughly half the percentage in more developed countries, but in the eyes of retailers that means more opportunity.
“Conspicuous consumerism is on the rise among Chinese,” said Fu Hongchun, a business professor at East China Normal University in Shanghai. He said the trend is driven in part by competitiveness. “If one resident in a community buys a new TV, all residents in the same community will update their TVs,” Fu said.
Increasing consumer spending is a key goal of the $586 billion economic stimulus package unveiled Sunday by China’s leaders. China hopes the cash infusion will help offset slowing exports and investments, which were the foundation of the country’s boom over the past decade…
[S]ome Chinese consumers are also adopting the biggest vice of American consumers: debt. Mesmerized by a banquet of Western-style financial products, some Chinese consumers are juggling multiple credit cards, consumer loans and installment plans to buy an ever-increasing quantity of cars, washing machines and vacations…
James E. Quinn, global president for New York-based Tiffany, said in an interview that Chinese customers are the “fastest-growing segment” of its business. “A lot of American customers have a complete wardrobe of jewelry, passed down from previous generations. That’s not the case in China. Chinese consumers are at the early stage of acquiring a sense of style and appreciation for design in jewelry.”
U.S. companies have been so successful in China because “Chinese consumers have a ‘look up to the rich’ attitude and the United States is the world’s top developed country in their eyes,” said Gao Tao, a consultant for the International Brand Association in Beijing…
Now, having China encourage their own consumption is not necessarily a bad thing for the U.S. economy given that more Chinese demand for consumer goods can mean more U.S. exports to China, at a time when we don’t have much else going for our GDP because we’re (rather startlingly) having a hard time keeping up our own consumer demand. In the immediate run, we’re worried about keeping up our immediate GDP. But the other part of GDP we’re clearly relying on to stay afloat is federal government spending, and the fact is we’re doing a lot of deficit-financed government spending lately–i.e., we’re issuing more Treasury debt. We’re issuing that extra debt and at the same time hoping investors, largely including foreign investors, will keep being willing to scoop it up and hold it for a relatively low price (i.e., interest rate).
So the conflicting economic policy goals the U.S. faces in stimulating short-term consumption versus encouraging longer-run saving actually spread beyond our borders to those other countries we rely on in our global capital and goods transactions as well. What should we be rooting for–for China to become more of a Squanderville, or for China to stay the Thriftsville they’ve been? Seems to me that while it’s clearly in China’s self interest to be consuming more than they’re accustomed to consuming, at least during this (global) economic slowdown, for the U.S. economy’s sake, we’ve got to hope that the Chinese people don’t get too good at consuming. Because Americans will always be some of the best consumers in the world, and American enterprises (private and public) some of the best things in the world to invest in, so “comparative advantage” suggests we’ll always be better off relying on the Chinese not as demanders of American exports, but as suppliers of the capital (the saving) that we can’t seem to (sufficiently) come up with on our own.
Either that, or we’ll have to really get working at trading roles with China and becoming much more like a Thriftsville–at least after we get through this rough spot.